“The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007-09 recession and slow recovery.”
“The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007-09 recession and slow recovery.”
So begins the ominous warning from the Congressional Budget Office in its latest Long-Term Budget Outlook analysis for 2015.
The CBO projects that the federal debt held by the public will exceed 100 percent of the nation’s gross domestic product by 2039 — up from 74 percent today (already nearly twice the 38 percent average for the last 50 years) — and hit 103 percent in 2040. That is slightly better than last year’s projection of 106 percent by 2039, though not because of any fiscally responsible policies adopted by Congress.
Rather, the projection improved simply because CBO reduced its interest rate assumptions a tad. The average real interest rate assumption fell from 2.2 percent last year to 2.0 percent this year. Yet, the Federal Reserve cannot continue to print money and suppress interest rates forever, and when that ends, even moderate increases in interest rates will significantly raise the nation’s debt service costs.
The CBO forecast shows debt and entitlement spending on programs like Social Security, Medicare, Medicaid and Affordable Care Act subsidies eating up larger and larger portions of the federal budget, forcing discretionary spending to fall from 11.6 percent of GDP today to 6.9 percent in 2040, which would be the smallest share since the Great Depression.
In order to return debt levels to the 50-year average of 38 percent of GDP by 2040, CBO estimates the government would need to increase revenues by 14 percent or cut spending by 13 percent per year. That translates to $480 billion in tax increases or spending cuts next year, or about $1,450 per person.
Though those in Washington like to ignore debt, and the numbers have gotten so astronomical that it is difficult to even wrap one’s mind around the extent of it, such vast borrowing has substantial effects. In addition to the moral bankruptcy of unfairly burdening future generations, increasing debt, like government spending, crowds out activity in the productive sector of the economy, depressing economic growth and the standard of living. Debt does matter, and the sooner we start to get a handle on it, the brighter the economic future will be for us and our posterity.